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Inefficiency of competitive equilibrium with hidden action and financial markets

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  • Luca, PANACCIONE

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

Abstract

In this paper, we study a pure exchange economy with idiosyncratic uncertainty, hidden action and multiple consumption goods. We consider two different market structures : contingent markets on the one hand, and financial and spot markets on the other hand. We propose a competitive equilibrium concept for each market structure. We show that the equilibrium with contingent markets is efficient in an appropriate sense, while the equilibrium with financial and spot markets is inefficient, provided that assumptions on preferences more general than those usually considered in the literature hold.

Suggested Citation

  • Luca, PANACCIONE, 2006. "Inefficiency of competitive equilibrium with hidden action and financial markets," Discussion Papers (ECON - Département des Sciences Economiques) 2006049, Université catholique de Louvain, Département des Sciences Economiques.
  • Handle: RePEc:ctl:louvec:2006049
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    References listed on IDEAS

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    1. Arnott, Richard & Stiglitz, Joseph E., 1986. "Moral hazard and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 29(1), pages 1-24, February.
    2. Arnott, Richard & Greenwald, Bruce & Stiglitz, Joseph E., 1994. "Information and economic efficiency," Information Economics and Policy, Elsevier, vol. 6(1), pages 77-82, March.
    3. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
    4. Kocherlakota, Narayana R., 1998. "The effects of moral hazard on asset prices when financial markets are complete," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 39-56, February.
    5. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 229-264.
    6. Marcos B. Lisboa, 2001. "Moral hazard and general equilibrium in large economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(3), pages 555-575.
    7. Malinvaud, E., 1972. "The allocation of individual risks in large markets," Journal of Economic Theory, Elsevier, vol. 4(2), pages 312-328, April.
    8. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, vol. 10(1), pages 8-23, February.
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    Cited by:

    1. Magill, Michael & Quinzii, Martine, 2008. "Normative properties of stock market equilibrium with moral hazard," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 785-806, July.

    More about this item

    Keywords

    Hidden action; enforcement; constrained efficiency;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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